FICO Remains the Most Widely Used Credit Score

By Sally MaisonPublished: Thursday, November 19th, 2009

Despite the new credit score models appearing today, FICO remains the most widely used consumer rating model in the United States. Experts note that majority of mortgage lenders, banks, finance companies, and insurance firms use the system developed by Fair Isaac and Company.

Fair Isaac and Company developed the first credit scoring model in 1958 for a finance group called American Investments. In 1970, the firm developed the first credit rating for a bank when American Banks and Trust request for a system that will provide them with a brief summary of their clients’ financial capability. FICO became even more popular in the 1990’s when Fannie Mae endorsed the FICO credit score as the model to be used by mortgage collectors.

Three years ago, the three major bureaus attempted to win business from Fair Isaac by devising their own rating model called VantageScore. However, this score varies from bureau to bureau because of data differences among them. Since many lenders would prefer not to change the model they already use, FICO remained to be the most popular model in the United States. The latest model developed by the company is called FICO08, and still uses the same scoring range that runs from 300 to 850.

Financial planner Stephanie Sherman says a FICO credit score is calculated from the reports issued by the three major bureaus: Equifax, Experian, and TransUnion. Payment history, amounts owed, length of credit history, new credit and types of credit used are data found in a credit report which FICO analyzes to determine a consumer’s rating.

Fair Isaac does not disclose how they interpret those data so finance experts cannot fully explain to consumers how their credit score is calculated. But experts do know that payment history makes up 35 percent of a score, credit utilization makes up 30 percent, length of credit history is at 15 percent, while types of credit used and recent credit activities each make up 10 percent of a score.

Consumers are advised to pay their bills on time, avoid racking up too much debt, keep old credit cards, and apply for loan only when necessary in order to have an excellent credit score.

As of July this year, the average consumer score is 680. Lenders say American consumers are doing all right but they are not faring well. Fannie Mae’s required rating is 620, which makes most Americans eligible for a loan application from the federal creditor. But lenders remark that a good rating should be somewhere above 700. With an economic crisis that is still looming around the corner, consumers are advised to do their best to go past the 700 mark.